What are the benefits of investing in mutual funds?

It is very difficult for many individuals to manage their own money. It is tough to study and analyse companies and transact to buy /sell different securities on one’s own.

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Even a sum as small as Rs 500 invested regularly over a period can build a good corpus through the power of compounding. ET explains what mutual funds are and how it can help in meeting your financial goals.

What is a mutual fund?
A mutual fund is an investment vehicle in which investors pool money to earn returns over a period of time. The money collected is managed by a fund manager who is an investment professional. The money is invested in different securities such as bonds, stocks, gold and other assets and seek to provide potential returns. Any gains or losses that come in from these investments are shared by investors in proportion to their contribution to the fund.
  • 12.86%Annualized Return for 3 year
  • >3 years Suggested Investment Horizon
  • 4.10 YearsTime taken to double money


What are the different types of mutual funds?
There are broadly three kinds of funds: debt funds, equity oriented funds and hybrid funds. Debt funds invest in assets like government securities and corporate bonds. These funds aim to offer reasonable returns to the investor and are considered relatively less risky. Equity funds invest in stocks and look to give investors capital appreciation. Since the returns on equity funds are linked to market movements of stocks, these funds have a higher degree of risk. Hybrid funds invest in a mix of both equity and fixed income securities. The proportion of equity could vary between 0-100%.

What are the benefits of investing in a mutual fund scheme?
It is very difficult for many individuals to manage their own money. It is tough to study and analyse companies and transact to buy /sell different securities on one’s own. A mutual fund gives you professional fund manager for a small fee. This fund manager buys or sells companies, analyses them and tracks them regularly.

Secondly, mutual funds help you diversify your investments. When you invest only in a single security, you could risk a loss if the market crashes. However, you can avoid this problem by investing in different asset classes and diversifying your portfolio. If you were investing in stocks and had to diversify, you would have to select at least 10 stocks carefully from different sectors. This can be a lengthy, time consuming process. For instance, if you invest in a mutual fund that tracks the NSE Nifty you would get access to as many as 50 stocks across sectors in a single fund. This could reduce your risk to a large extent.

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Are returns from mutual funds assured?
Mutual funds cannot guarantee returns to investors as they are linked to market performance. So, if the market is on a bull run and it does exceedingly well, this is reflected in the value of your fund. However, a poor performance in the market could negatively impact your investments. Unlike traditional investments ,mutual funds do not assure capital protection. Hence investors should do their research and invest in funds that can help you meet your financial goals.
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